FEBRUARY 28, 2012

TDS should not be deducted on element of Service Tax; Avoid Retrospective Amendment

By H K Jana

A. Issues related to Income Tax Act

1. Perquisite Tax on Housing Accommodation u/s.17(2):

 i. Presently Perquisite towards unfurnished accommodation provided by a PSU company to its employees is considered @ 15%, 10%, 7.5% of salary depending upon the location of the accommodation as the case may be. In case of furnished accommodation, the perquisites will be increased by 10% p.a. of the cost of furniture, etc. Considering such perquisites towards accommodation and levying tax thereon is purely against the basic principles of natural justice. This view is based on the following points:

a)  Major industrial undertakings are normally not located within the city area. Accordingly, as the same is located away from the city, construction of quarters in the nearby area of the plant and providing the same to the employees is purely for smooth running of the plant.

b) In case the quarter is not provided to any employee, the company is paying HRA @ of 30% or 20% of basic pay as the case may be. The same is taxable in the hands of the employee subject to certain exemption under section 10(13A). The rent if any paid by such employees are usually met from the HRA amount. On the other hand, if the quarter is provided to an employee, he or she is not getting any HRA. As a result the profit of the company is increased to the extent HRA not paid to such employees. Consequently, the company is paying tax on such amount.

c)  There is a substantial financial loss to the employees staying in company provided quarters as because of paying house perquisite tax without getting any HRA. As a result the employees are vacating quarters and prefer to stay outside. Consequently the very purpose of construction of quarters in the nearby area of the plant and providing the same to the employees for smooth running of the plant is defeated.

d)  Further, in many organizations, the employee has no option to stay outside due to locational situation of the organization and due to nature of organization. Thereby employees are forced to pay higher taxes on house perquisites and causes hardship to them.

e) The House Perquisite Tax is exempted in case of Government employees although they are mainly staying in the main part of the city area.

f)  There is also no logic of considering perquisite of housing accommodation at a fixed % of salary without linking to the prevailing rentals of the concerned locality. Under the existing provision for exactly similar house the perquisite value is varying depending upon the grade and pay of the employee occupying the quarter.

 ii. Recommendations:

Considering the fact as stated above and keeping in view of the interest of an organisation, the perquisite on housing accommodation in case of PSUs/ large organizations may be exempted.

2.  Asset Not owned by the Assessee and Treatment under IT Act
U/s. 32

i. In computation of income from business or profession under the Income Tax Act, revenue expenditure is allowed as business expenditure and depreciation is allowed on capital expenditure incurred in acquiring eligible assets. But, in certain situation the assessee invests and utilize the asset for the purpose of business although the legal ownership lies with the Government or other organization (e.g, Construction of Railway siding, Power lines, etc). In such cases, the department is not allowing depreciation stating that the asset is not owned by the assessee. At the same time it is also not allowed as revenue expenditure stating that the expenditure is not in the nature of revenue.

 ii. Sec 32 of the Act allows for depreciation on assets owned by the assessee and used for the purpose of business of profession. The word “owned” as it occurs in sub-section (1) of sec 32 is interpreted in two ways i.e. legal ownership Vs. beneficial ownership. According, to this controversy in many cases assessee is denied of the benefit conferred by sec 32 and so defeating the intention of the legislature.

 iii. The Hon'ble Supreme Court in Mysore Minerals Ltd Vs CIT (1999) has opined that the word “owned” must be assigned a wider meaning and beneficial owner of the assets is entitled to claim depreciation. It is also further mentioned that the tax benefit on account of depreciation legitimately belongs to one who has invested in the capital asset and thereby losing gradually investment caused by wear and tear to replace the same by having lost its value fully over a period of time. In case the depreciation is not allowed to the legal owner, depreciation cannot be claimed by the legal owner as neither have they invested nor they are utilizing the asset and such situation i.e, benefit to none could not have been intended by the legislature.

 iv. Recommendation:

Suitable provision may kindly be made giving a wider definition to the word “owned” to allow depreciation or alternatively it may be allowed as revenue expenditure, since genuine expenditure incurred is presently not allowed either as revenue or capital expenditure.

3. Treatment of Prior period Adjustment u/s.37.

 i. Prior period items arise as a result of mistakes, errors or omissions in the accounts of earlier years. At present as per the existing provisions u/s. 28 to 37 of the Income tax Act, Prior period incomes are taxable whereas prior period expenditures are not allowed. As regards allow ability of expenditures, the expenditures which pertain to previous year are only allowed in calculating income under the head business or profession. As the assessee on his own brings these items to the books in the succeeding year so as to rectify the mistake that crept earlier he is burdened with tax at normal rates on this business expenditure. This is not a case where such items are brought forward during assessment or other wise and hence the treatment given in this case shall not be penalizing in nature. Moreover, an error on income side is taxable at applicable rate.

 ii. Further, according to section 72 of the Income Tax Act, the Business loss of preceding years are allowed to carry forward for a period of 8 years and set off from the business income of the previous year but where as no such provision exists for deduction of preceding years eligible business expenditure (prior period items).

iii. Recommendation:

Considering the fact that errors can be of either side and financial implication thereon in case of disallowance, it is suggested, to kindly examine the issue and make necessary provision to allow ‘Prior Period Business Expenditures' in the year of rectification as it is taxed in the case of ‘Prior Period Income'. However, there can be time limit to allow the same i.e, for a period of 8 years in line with provisions of Section 72 of the Income Tax Act.

4. Specific provision to allow certain ascertained liabilities:

 i. Under the mercantile system of accounting all companies are obliged to recognize certain expenditures as per the Accounting Standard 15-(Employee Benefits like retirement benefits, Employees Family Benefits Scheme, Long Service Awards, etc) which is also mandatory since the financial year 2006-07. Considering the fact that it is the liability towards ascertained employee cost for the present services, determined based on actuarial valuation i.e, on a realistic and scientific basis, the courts are deciding the same as an allowable expenditure. However, in many cases the Assessing Authority is treating it as contingent is nature simply stating that the payment is to be made after retirement or on attaining at certain age of the employee.

 ii. Recommendations:

Considering the fact as stated above, specific provision may kindly be made to allow employee cost for the present services, determined based on actuarial valuation i.e, on a realistic and scientific basis.

5. Removal of Section 40(a)(i)/ 40(a)(ia)

 i. As per the prevailing provisions of the Income Tax Act, TDS u/s.194C, 194J, 194I etc is to be deducted at the time of credit or at the time of payment whichever is earlier. For finalization of accounts under the Companies Act, under the Mercantile System of Accounting necessary incomes or expenditures relating to relevant financial year are to be accounted. Whereas the actual bills may be received subsequently i.e, may be on completion of the complete work or as per the terms of various contracts. In case of big organizations like us it is a cumbersome work to keep track of all expenditures and reconciliation with respect to actual bills received from time to time at a later date.

 ii. As such under the present provisions of Income Tax Act, there are large number of consequences w.r.t. defaults in TDS e.g,

a) Raising demand of tax not deducted u/s.201

b) Charging of Interest u/s.201(1A)

c) Levying penalty u/s.271C

d) Levying penalty u/s.221

e) Prosecution u/s.276B

f) Etc.

 iii. Further, TDS remittances and returns are being filed electronically. There is a provision under the Tax Audit Report in form 3CD in which the Auditors are certifying about the compliance of TDS provisions and in case of any defaults they have to certify for the same.

 iv. Further, the mode payment of tax under TDS is intermediary. The actual liability to pay tax actually lies on the Assessee on whose income the TDS is deducted.

 v. Considering the above mentioned aspects, further provision penalizing the deductor by disallowing the expenditures and forcing them to remit taxes under normal rate (i.e, at effective rate of 32.445%) is grossly injustice and bad in law.

 vi. Recommendations:

Considering the large number of penal provisions/ consequences as brought out under point no. (ii) above, the additional penal provision i.e, disallowances of expenditures u/s.40(a)(i) or 40(a)(ia) shall be withdrawn as the same resulting hardship to the assesses.

6. Disallowance of Expenditure u/s 40A(3)

 i. As per the provisions of section 40A (3) of the Act, a payment or aggregate of payments made to a person in a day by cash exceeds Rs.20,000 otherwise than by an account payee cheque /draft, such expenditure is not allowed as deduction in computation of income subject to Rule 6DD of the IT Act which provides certain exemption. But the same does not contain the nature of payments to employees by way of advance like tour advance, imprest advance or any other advance in which the expenditures are accounted subsequently on submission of bills by the respective employees.

ii. Recommendations:

In order to have better clarity, it is suggested that such advances shall be included in the list of exempted payment under Rule 6DD of the IT Rules. Further the limit of Rs. 20,000 can be enhanced to Rs. 50,000 since the limit was fixed way back in 1997.

7. Leave Encashment u/s 43B

 i. T h e Finance Act, 1983 introduced Section 43B in the Income Tax Act, 1961 with effect from April 1, 1984, for preventing companies from getting deduction for unpaid Statutory Liability without discharging the same.

 ii. In the case of Bharat Earth Movers Vs. CIT (2002-TIOL-123-SC-IT), the Hon'ble Supreme Court considered the question of deduction for provision for leave encashment as per the scheme floated by the company and gave its verdict that the liability estimated with reasonable certainty can be claimed as deduction though it will be discharged at a future date.

iii. Subsequently, by Finance Act, 2001 inserted sub-clause (f) to section 43B barring deduction of any sum payable by the company as an employer in view of any leave at the credit of the employee.

 iv. Now, in the present case of Excide Industries Ltd Vs. UOI 292 ITR 470, Cal, the Hon'ble Calcutta High Court ruled that Leave Encashment is neither a Statutory Liability nor contingent nature. Accordingly, the amendment as brought by inserting sub-clause (f) to section 43B, only to nullify the Judgement made in the Bharat Earth Movers case. No amendment can be made for the sole object of nullifying the Apex court decision. There was no nexus between the amendment and the main objects behind section 43B and accordingly, the Hon'ble Calcutta High Court struck down section 43B (f) as arbitrary, unconscionable.

v. Recommendation:

Taking in view the judgment given by the Hon'ble High Court in line with the decision of Hon'ble Supreme Court of India, it is suggested, to remove sub-clause (f) to section 43B.

8. Applicability of TDS on service tax charged by the contractors u/s.194C, etc

i. CBDT has issued Circular no. 4/2008 dated 28 th April 2008 thereby clarifying that no TDS is required to be deducted on the service tax charged on the rental income payable u/s 194I of the Act as it is not forming part of rental income. The logic given in the circular is quietly applicable to all other payments to contractors under different sections of the Act like 194C, 194J, etc. But in the absence of such clarification with respect to other section different assessee may follow differently i.e, some will follow the logic and apply the aforesaid circular under all the sections and some may follow strictly only w.r.t. section 194I.

ii. Recommendation:

It is recommended that necessary clarification may be issued by CBDT to follow the logic of the above circular no. 4/2008 dated 28 th April 2008, as if it is applicable to all relevant TDS sections i.e, in summary TDS should not be deducted on the element of Service Tax.

9. Interest on Excess Refund u/s.234 D

 i. The provision under sub section (1) of section 234D of the income Tax Act is as under:

Subject to the other provisions of this Act, where any refund is granted to the assessee under sub-section (1) of section 143, and-

no refund is due on regular assessment; or

the amount refunded under sub-section (1) of section 143 exceeds the amount refundable on regular assessment, the assessee shall be liable to pay simple interest at the rate of [one-half] per cent on the whole or the excess amount so refunded, for every month or part of a month comprised in the period from the date of grant of refund to the date of such regular assessment.

ii. Under the above provision, the Assessing Authority is treating the date of order u/s.143(1) as the date of grant of refund and charging interest from the month in which the intimation u/s.143(1) is passed. Again, the interest is charged till the month in which the assessment order is passed ignoring any payments made by the assessee after receiving the refund but before the date of regular assessment. By doing so, the injustice to the assessee is nothing but charging of excess interest as mentioned hereunder.

 iii. In practice, the refund receives by the assessee is much latter than, the date of order u/s. 143(1) and in case the amount is more the interest implication will also be more. To illustrate

 iv. The Assessing Authority is considering the date of order u/s.143(1) as the date of granting refund and charging interest accordingly. Further, the intermediary payment is not adjusting against the earlier excess refund i.e, even after receipt of amount from the assessee interest is charged till the regular assessment. The adjustment is made only after raising demand along with interest at the time of regular assessment. By treating in this manner, as per the example given above, the excess interest charged on the assessee to the tune of Rs.1.6 Crs i.e, for the period from 01.03.2010 to 30.04.2010 and from 01.07.2010 to 31.12.2010.

v. Recommendation:

Considering the injustice and financial implication thereon as brought out above, it is suggested, to kindly examine the issue and suitable amendment may kindly be made i.e, (1) instead of interest from the date of grant of refund it should be from the date of receipt of refund by assessee and (2) provision for adjustment of intermediary payments, if any before the regular assessment.

10. Providing Tax Relief during capital Expansion

i. The Company has drawn its' Corporate Plan aiming to reach 16 Mt. by 2016 in phases and is presently executing its first phase of expansion of liquid steel production to 7.3 Mt. by 2012-13. The total estimated project cost of this first phase is Rs.12292 crores. Mobilisation of such huge resources for project construction without seeking any budgetary support from the Government under these circumstances is a very challenging task.

ii. Recommendation:

Suitable provision may kindly be made to provide relief to the Company as a special case, by subjecting it to pay Income Tax on its' profits @ 50% of normal rate i.e. 15% against the regular corporate tax rate of 30%.

11. Due Date for Payment of Taxes

 i. As per the provisions of Income Tax Act, the taxes like advance tax shall be paid on or before the due date prescribed in the Act. CBDT has vide circular no. 676 dt.14.01.94 clarified that where the last day for payment of any installment of advance tax is a day on which the receiving bank is closed, the taxpayers can make the payment on the next immediately following working day. However, CBDT has vide notification 34/2008 dt. 13.03.08 inserted a new rule -125 in the Income Tax Rules, as per that w.e.f. 01.04.2008, it is mandatory for the company to pay tax electronically. Under the present scenario, the availability of payment mode on bank holiday like, internet banking, etc is creating doubts in the minds of the tax payers about the applicability of the aforesaid circular no.676 dtd. 14.01.1994.

 ii. Recommendations:

Under the revised rules as mentioned above (i.e., payments through electronic mode), the CBDT may issue necessary circular clarifying the position that where last day for payment of any types of tax i.e., either advance tax, TDS/TCS, etc falls on a public holiday/ bank holiday, the taxpayers can make the payment on the next immediately following working day.

12. Dispensing the provisions (Section 44DA, 44AA & 44AB), relating to the maintenance of books of account and audit as applicable in case the non-resident is deemed to be having permanent establishment in India.

 i. We, a Government of India Undertaking under the administrative control of Ministry of Steel, Govt of India, are operating an integrated steel plant at Visakhapatnam presently having the capacity of 3MTPA of steel. We have undertaken the expansion project to increase the existing capacity to 6.3MTPA by 2010-11. The expansion work has already been started.

ii. Being one of the best integrated steel plants in the World we strive for the latest and modern technology available in the World. In this context, we, during the course of our normal business and expansion process, enter into contracts with various international contractors for purchase of imported plant and equipments, supervision of installation and erection and commissioning of the same and for getting expert technical assistance in the normal operation of plant and machinery as well as for its maintenance.

iii. Since the services rendered by the overseas contractors are highly sophisticated and the equipments what we purchase are mostly from OEMs , we are at the receiving hand as far as the commercial terms of the contracts are concerned. As a result, most of the terms and conditions of the contracts are being determined most favorable to overseas contractors/suppliers. Under such circumstances we are sometimes bound not only to bear the Indian tax liability of such contractors but also to comply with the provisions of Indian Income Tax Act as representative assessee.

 iv. The law dealing with the taxation of such international transactions under the Indian Income Tax Act, 1961 is very cumbersome particularly when the overseas contractor is deemed to be having Permanent Establishment in India. Since the installation of giant plant like us would always take long time, by virtue of the provisions of relevant DTAA, most of our contracts will fall under the category of parties having permanent establishment in India.

v. In such cases, income accruing or deemed to be accrued in India under the contract to the parties shall be computed under the head ‘Profits & Gains of Business or Profession' as per the provisions of Section 44DA of the Act. Moreover, the assessee has to maintain the books of accounts as prescribed and get those books of account audited by Chartered Accountant as per provisions of Section 44AA and 44AB of the Act. Under the provisions of DTAA also such fees for technical assistance is supposed to be taxable under the head ‘Business Profit'.

 vi. By virtue of section 161,162 & 163 of the Income Tax Act, 1961, any person treated as agent of non-resident shall be responsible to comply with the provisions of the act with respect to the income deemed to have arisen in India to the non-resident as if the same has arisen to him. In otherwords, he has to get the income duly assessed and discharge all the tax liability of the non-resident.

 vii. When the non-resident voluntarily not maintaining the books of accounts under the provisions of the Income Tax Act say, 44DA, 44AA & 44AB relating to maintenance of books of account and audit, it is really not possible for the representative assessee to comply with the provisions of the Act since it is practically impossible to ascertain the profit of the non-resident contractors/suppliers, in the absence of proper records and information from the non-resident.

vii. Recommendations:

In view of the above mentioned practical problems being faced by all representatives assesses, we make our representation that, application of the provisions ie., Section 44DA, 44AA & 44AB, relating to the maintenance of books of account and audit to representative assessee may be dispensed with. Perhaps, a reasonable flat rate of withholding tax may be prescribed in the Act which shall be applied on the gross payments to non-residents instead of normal rate of tax as applicable at present on the profit of the permanent establishment representative in assessee cases. Such a amendment will help the residents taking services from the non- residents to determine the tax liability of the non-resident under the relevant contract at the time of tender finalization and decide accordingly.

13. Limiting the responsibility of representative assessee to the extent of submission of contract details at initial stage.

 i. As per section 149(3) of the Act, the time limit for issuing a notice u/s 148 (notice for assessing the income of the non-resident in the hands of his agent as representative assessee), supposed to be issued to a person, treated as agent of non-resident u/s 163(2) is two years from the end of the relevant assessment year.

 ii. Under the circumstances where the duration of the contracts entered into with the non-residents is very short and the provisions of the Act are not duly taken care in the contract and where the contractors are not extending any co-operation to the agent to comply with the provisions of the Act, the agent is unwarrantedly put to hardship and incur extra tax burden on account of interest, penalty etc., on the income derived by the non-residents in India.

 iii. Recommendations:

Necessary provisions may be made in the Act that every person, going to have business connection with non-resident, is supposed to provide at the initial stage of contract itself all the details of the contract like name and address of the contractor, contract value etc., to the Income Tax Authorities. Once such information is furnished by the agent, his responsibility as representative assessee should be dispensed with.

14. Insertion of Section 206AA and Deletion of section 160,161 & 163:

 i. By virtue of section 206AA of the I.T. Act, 1961, tax at source shall be made at higher rate in case Permanent Account Number (PAN) is not available. Indirectly, this section intends to encourage the use of PAN in all situations and to have proper net work of assesses in order to ensure better compliance of the Act. It means that having PAN is compulsory in all cases including non-residents. In such cases, where the non-resident is compelled to obtain PAN in India, he shall be responsible for compliance of the provisions of the I.T. Act, 1961 including assessment and discharge of tax liabilities etc.,. In view of insertion of the section 206AA in to the Act, it is felt that the section 161,162 & 163 dealing with the representative assessee becomes redundant because the non-resident having PAN is indented to discharge the liabilities under the Act either in person or through authorized representative or subsidiaries etc.,.

 ii. Recommendation:

Keeping in view the intention of the section 206AA and the practical problems of the representative assesses in discharging the tax liability of the non-residents, it is proposed to delete the sections dealing with representative assesses say, 161,162 & 163 of the I.T. Act.

15. Retrospective Amendments:

 i. Invariably, every year one or two amendments to the I.T. Act are being brought out with retrospective effect and that too relating to a long period ago say, 1976. As a result of such retrospective amendments, sometimes additional/new tax liability is being cast on the assessee in respect of those transactions which took place very long ago. Bringing retrospective amendments is acceptable as long as the same is relating to some procedural law dealing with some prescribed procedures which need change due to some development in its implementation. However, any retrospective amendment to law which in turn creates additional liability on the assessee is against the basic principles of natural justice. Sometimes, such retrospective amendment is being inserted into the Act with the intention to nullify the judicial pronouncements. There are number of judicial pronouncements which state that procedural amendments may be with retrospective but any amendment to law which enhances the liability of the assessee shall always be prospective.

Some of such judicial pronouncements are state below:

It was observed by Hon'ble Supreme Court in the case of Sedco Forex International Drill Inc V CIT - (2005-TII-01-SC-INTL) that an explanation to a statutory provision may fulfill the purpose of clearing up an ambiguity in the main provision or an explanation can add to and widens the scope of the main section. If it is in its nature clarificatory then the explanation must be read into the main provision with effect from the time the main provision came into force. But if it changes the law it is not presumed to be retrospective irrespective of the fact that the phrases used are ‘it is declared' or ‘for the removal of doubts'.

In the case of Cawasji (D) & Co. V State of Mysore (1984) 150 ITR 0648 = (2002-TIOL-354-SC-CX), Hon'ble Supreme Court held as follows:

‘to the extent that the Act imposed the higher levy with retrospective effect and sought to nullify the judgment and order of the High Court, the Act was invalid and unconstitutional'

 ii. Recommendation:

Considering the adverse impact of retrospective amendments on the assessee, it is proposed that insertion of retrospective amendments to the Act shall be discouraged and those such amendments already inserted into the Act like Explanation No.2 inserted below the sub section (2) to section 9 of the Act by the Finance Act, 2010 with retrospective effect from 01.06.1976, shall be made prospective.

16. Disallowance of Expenditure on employee benefits u/s 40A(9):

 i. As on date AS 15 is mandatory. The companies are required to provide necessary expenditure on different types of employee benefits like Post Retirement Benefits, Employees Family Benefit Scheme, Long Service awards, etc. Most of the companies are providing necessary expenditures on such heads based on actuarial valuation. Considering the fact (1) the company follows the mercantile system of accounting, (2) the amount being provided in the accounts are based on the actuarial valuation certificates issued by Consulting Actuary (Fellow of Institute of Actuaries, London, Fellow of Actuarial Society of India) after due consideration of provisions /rules of the company for Employees Family Benefit Scheme, Guidance note issued by Actuarial Society of India, Accounting Standard 15 issued by the Institute of Chartered Accountants of India, LIC Mortality Table, etc.. (3) it is being supported by the number of decisions of the Hon'ble Supreme Court/ High Courts, these amounts are akin to any other expenditure incurred during the relevant financial year and not at all contingent in nature, these are allowable expenditure.

 ii. Recommendation:

Considering the above, a specific provision may be brought to allow employee benefits keeping in view the provisions of Accounting Standards (AS) 15. There, may also be a provision to create fund in line with superannuation fund, gratuity fund etc. so that the companies may contribute to such funds. As on date there is no provision to crate fund or approval of such funds other than Approved PF, Gratuity Fund or superannuation Fund.

B. Issues related to Wealth Tax Act

1. Salary limit under Section 2(ea) of the Wealth Tax Act, 1957

iii. U/s. 2(ea) (i) of the Wealth Tax Act, a residential house does not include for computation of wealth tax purpose, if the same is exclusively for residential purposes and allotted by a company to an employee or an officer or a director who is in whole-time employment, having a gross annual salary of less than five lakh rupees.

 iv. The aforesaid limit was fixed by the Finance (No.2) Act, 1998 w.e.f. 01.04.1999 which is more than eleven years old as on date the salary level of employees have increased substantially.

 v. Recommendation:

In view of the above, the annual gross salary of less than five lakh rupees as aforesaid u/s. 2(ea)(i) may be substituted suitably by Twenty five lakhs rupees . Further, as the salary increases from time to time, the said amount may be reviewed on yearly basis instead of once in 10 or 15 years.

(The author is Asst. General Manager (F&A) Rashtriya Ispat Nigam Ltd)